Power Punters Face $billions in “Fines” as Mandatory RET Deemed “Doomed to Fail”

In our earlier posts (here and here) we outlined the fact that – under the mandatory Renewable Energy Target – retailers are fined $65 per MWh for every MW they fall below the mandated 41,000 GWh annual target: what’s called the “shortfall charge” – follow the links here and here.

With less than 23,000 GWh coming from renewable sources annually at present – and no likelihood of any significant wind power capacity being added between now and 2020 – Australia will fall short of the fixed target by a figure in the order of 18,000 GWh. By operation of the Renewable Energy (Electricity) Act 2000 – when the target hits 41,000 GWh in 2020 – the fine will apply to that figure.

The fines paid by retailers will be collected by the Commonwealth and be directed into general revenue.

The cost of the fine compares with the average wholesale price of between $35-40 per MWh. Therefore, at a minimum, retailers will be paying $100-105 per MWh (the average wholesale price plus the fine). Retailers have already announced that they will simply recover the cost of the fine from their retail customers (see our posts here and here).

Retailers will add a margin to that in the order of 10% (or more) which means Australian power consumers will be paying upwards of $115 per MWh: 3 times the average wholesale price.

The Australian Energy Market Commission, EnergyAustralia and AGL have all united to declare that meeting the 41,000 GWh annual target will be impossible; and that, as a consequence, power punters will simply be lumbered with an enormous new electricity tax. Here’s The Australian on how the failure of the mandatory RET will end up costing households and business $billions; for no meaningful purpose at all.

Warning on penalties for RET shortfall
The Australian
Annabel Hepworth
30 May 2014

THE policy of mandating large-scale renewable energy projects is not “sustainable” and an insufficient number of wind and solar farms will be built to meet Australia’s target, the Abbott government’s energy tsar has warned.

In a move that adds to pressure on the Coalition to make dramatic changes to the Renewable Energy Target, the Australian Energy Market Commission has revealed the target of 41,000 gigawatt-hours of electricity by 2020 “is unlikely to be met”.

If the target is not met, energy retailers will have to pay the government “shortfall” penalties that could total $3.5 billion, according to modelling commissioned by the AEMC.

This cost would be passed on to consumers.

Australian Energy Market Commission chairman John Pierce warns: “We do not consider that the current policy is sustainable.”

In a submission to the RET review panel led by businessman Dick Warburton, Mr Pierce points to the situation in Britain, where an expected investment shortfall has forced the government to intervene in the market, and energy consumers will be subsidising the industry.

Some of Australia’s biggest energy companies are warning that consumers could end up paying a “significant tax”, but not for new wind and solar farms or hydro-electric schemes.

EnergyAustralia has declared that rolling out the new wind and solar farms to meet the target for the large-scale renewable energy target (LRET) is “virtually impossible”.

To meet the target, the “new build” rate would have to increase fivefold by 2020, but the time to do adequate community consultation “presents a challenge at even the current rate of ‘new build’’, EnergyAustralia warns.

EnergyAustralia says: “The combination of an oversupplied wholesale generation market, imminent removal of the carbon price and RET policy uncertainty make it extremely difficult for the market to finance and deploy substantial volumes of large-scale renewable generation capacity by 2020 … Consumers will be paying a significant tax for no new renewable energy.”

AGL Energy, which has invested $3 billion in hydro, wind and solar, has warned that its ability to make further investment in large-scale renewables is impaired for similar reasons.

The AEMC has told the RET panel that the RET should be moved to a “floating” 20 per cent target in 2020, based on electricity demand, rather than a fixed 41,000 GWh target.

Otherwise, it says, the RET should become an electricity-­sector scheme that encourages lower emissions technologies.

The RET is split into two targets: the LRET for 41,000Gwh of electricity from projects such as wind and solar farms, and the small-scale renewable energy scheme for installations such as rooftop solar PV panels.The Australian

When EnergyAustralia talks about the “current rate of new build” it could have said “snail’s pace”, instead: construction activity is, thankfully, grinding to a standstill.

A few projects are nearing completion: Snowtown Stage 2 – 90 turbines; Gullen Range – 73 (the developer was ordered to halt construction over planning breaches but Goldwind has simply ignored the order); and Mt Mercer – 64 turbines. And a few have just kicked off: Bald Hills – 52 turbines; Cape Bridgewater Stage 4 – 23 turbines; and Boco Rock – 67 turbines. When considering those numbers, bear in mind that there are over 1,200 turbines approved for construction in Victoria alone; the bulk of these had planning approval prior to 2010.

But, beyond that, there are no firm plans to construct wind farms anywhere else in Australia.

Moreover, the price of Renewable Energy Certificates has collapsed from around $40 last year to $25 now. A REC is issued for 1 MW of wind power delivered to the grid. The return from RECs is way below what is needed to cover standard operating costs for wind farms, which are in excess of $30 per MWh: providing a further explanation as to why wind power outfits will never obtain finance to build any more projects. The “lender of last resort” is the Clean Energy Finance Corporation (gleefully doling out taxpayers’ money to wind power outfits on an unsecured basis at the moment) which the Coalition intends to axe come July.

It’s on that basis that we estimate the true annual shortfall to be in the order of 18,000 GWh; simply because there will be no further increase in wind power capacity between now and 2020. A fact confirmed by the comments from EnergyAustralia and AGL.

For that reason we think that the estimate put forward by the Australian Energy Market Commission of the cost of the shortfall charge totalling $3.5 billion is way short of the mark. Either the modelling (wrongly) assumes a very substantial increase in wind power capacity prior to 2020; or the figure simply refers to the cost between now and 2020, which is more likely.

Given current renewable capacity of 23,000 GWh – under the legislation – the shortfall charge (fine) starts to bite from 2017.

Year

Target GWh

Shortfall GWh

Penalty Cost

2017

27,200

4,200

$273 million

2018

31,800

8,800

$572 million

2019

36,400

13,400

$871 million

2020

41,000

18,000

$1.17 billion

Total

$2.886 billion

Those numbers approach the $3.5 billion figure put forward by the Australian Energy Market Commission.

However, as noted above, the mandatory RET continues until 2031; and the $65 per MWh fine with it. That means power consumers will be paying around $1.17 billion every year from 2020 until the RET expires in 2031. In addition to the $2.886 billion in fines added to power bills (up to and including 2020) – between 2021 and 2031 – fines of almost $12 billion will be issued to retailers, recovered from power consumers and the proceeds pocketed by the Commonwealth.

Remember that the policy justification for the insane cost of the mandatory RET is that it would: “encourage the additional generation of electricity from renewable sources”; and “reduce emissions of greenhouse gases in the electricity sector”; and “ensure that renewable energy sources are ecologically sustainable”.

On the scenario outlined above, the Federal government will collect close to $15 billion from power consumers by way of the shortfall charge levied on retailers. However, there will be: NO additional renewable energy; NO “break-through” on-demand renewable energy technologies; and NO reduction in CO2 emissions. An outrageous outcome, now confirmed by Australian Energy Market Commission, EnergyAustralia and AGL.

Could there be a government policy any more bereft of merit?

Apart from the matters laid out by The Australian, the mandatory RET is unsustainable for very obvious political reasons.

UPDATE

Since this post went to press in May last year it’s become evident that the total contribution of eligible renewable generation sources available to meet the LRET target is (and will remain) stuck at 16,000 GWh annually. That means that the cost of the shortfall penalty over the life of the LRET will top $30 billion. For the breakdown and details, see our posts:

Given the moaning about the planned $7 Medicare co-payment for GP visits, just imagine the outcry if the Coalition had announced a stand-alone $15 billion tax on power consumers as part of the budget.

With The Australian spelling it out in clear and simple terms, it won’t be possible for the Coalition to sweep the insanity of the mandatory RET under the carpet. Very soon, the general (voting) public will come to identify the mandatory RET/REC scheme as nothing more then a giant TAX on all Australian power consumers: with the proceeds either chanelled as corporate welfare to near bankrupt outfits like Infigen (as RECs); or pocketed by the Government, as the shortfall charge. And all of that adding $50 billion or more to power costs, for absolutely no measurable benefit whatsoever.

With the Coalition government currently being belted at every political turn, it has a choice: either the kill the RET now; or face certain electoral oblivion later. Tony, it’s a case of now or never.

Comments

Just a detail: construction at Gullen Range is not “at a halt”. It’s continuing. Back in February the NSW Department of Planning “instructed” the developer to halt construction on turbines “closer to homes”. “Closer to homes” was the wrong criterion anyway, as construction ought to have been stopped on all illegally located turbines. But, setting that aside, construction just hasn’t stopped. It’s continued, and is going on as I write. There are only 5 turbines still to be erected. The developer has ignored the Department’s “instruction”, and the Department is allowing them to get away with it. The Department has allowed to developer to submit a Modification Application, which, no doubt, will shortly be rubber-stamped by the Department and the Planning Assessment Commission. The Department and the developers seem to be a law unto themselves.

The whole thing was just a brain dead idea in the first place. How supposedly intelligent Governments and Politicians fell for this long forgotten, out dated, and unreliable fraudulent proposition defies gravity. To keep asking the Australian electorate to put their hands in their pockets to help bail out our enormous deficit whilst on the other hand forcing us to give our hard earned dollars over to these parasites for expensive electricity and for outright subsidies, whilst Asia due to our cheap coal enjoys cheap and reliable electricity is a disgrace.

Trackbacks

[…] The “renewable energy certificate requirement” is that retailers purchase renewable energy (with which they receive RECs) and surrender RECs sufficient to satisfy the mandated target: 1 REC has to be surrendered for each MWh set by the target. If they fail to surrender enough RECs, they will be hit with the mandated shortfall charge of $65 per MWh for every MWh below the mandated target (see our post here). […]

[…] But the worst is yet to come: the real and most serious cost impacts of the mandatory RET kick in from 2017, when the target hits 27,200 GWh – from there, it rockets to 41,000 GWh in 2020 and continues at that rate until 2031 (see our post here). […]

[…] add a further $50 billion to power bills between now and 2031, when the RET expires (see our posts here and here). By failing to take into account these fundamental relationships, the boffins at ACIL […]

[…] Retailers don’t have to take wind power and, therefore, need not enter PPAs. However, they face the $65 per MW/h fine (the “shortfall charge”) for every MW they fall below the 41,000 GW/h annual target – the shortfall starts to bite in 2017 and will add something like $15 billion to Australian power bills over the life of the RET (see our post here). […]